Blu Putnam - Unintended Consequences of a Weaker Yen

Inflation Looms as Japan Accelerates Depreciation Effort

Recently-elected Japanese leaders have already started to deliver on campaign promises to depreciate the yen in an effort to boost the country's sluggish economy, as the currency hovers at the weakest levels against the U.S. dollar since mid-2010.

The recent yen softening may be just a prelude to declines to six-year lows and beyond, CME Group Chief Economist Blu Putnam wrote in a new report. On January 10, the yen traded around 88.7 to the dollar, a slide of nearly 14% since the beginning of October.

"From an historical or chartist perspective, in developing scenarios of possible yen moves, one probably should consider yen depreciation taking the exchange rate above 120 per dollar (where it last traded in July 2007), perhaps to 130 (April 2002) or even 140 (August 1998)," Putnam said.

But further yen weakening may carry unintended consequences for the heavily-indebted Japanese government, Putnam cautioned. For starters, depreciation threatens a long-term bull market in Japanese government bonds, leading to greater volatility amid prospects for rising inflation.

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